U.S. stocks are racing toward a third consecutive year of big gains, with major indexes near records to end 2021.

Even with the recent turbulence from the Omicron coronavirus variant, the S&P 500 is headed toward a 27% advance for 2021 and has hit 70 highs. It is the third straight year of double-digit gains for the broad index, and the second in the midst of the Covid-19 pandemic. The Dow Jones Industrial Average and Nasdaq Composite have gained 19% and 22%, respectively, this year, helping send the major indexes to their best three-year performance since 1999.

Some traders note that warning signs are flashing: Inflation could turn companies’ and customers’ finances upside down. Many companies that have been market darlings are losing money. Big-name stocks continue to log giant one-day swings. However, individual traders and institutional investors are hungry to take bigger risks and willing to accept bouts of volatility.

The year kicked off with a mind-bending start: Day traders who poked around with stocks early in the pandemic plowed money into meme stocks such as GameStop Corp., disrupting the power dynamic by which professional investors are usually the market king. Money managers say that this year more than ever, they are closely tracking where individual investors park their cash and monitoring their trading activity for clues on the market’s moves.

As the new year approaches, an increase in Covid-19 cases and the fast-spreading Omicron variant are forcing cities around the world to alter New Year’s Eve plans. Meanwhile, some health officials are updating quarantine guidelines to mitigate staffing shortages in key industries. Photo: Seth Wenig/Associated Press

Cryptocurrencies further entered the mainstream, helped by influencers including

Elon Musk

and the debut of the first bitcoin exchange-traded fund. Crypto prices soared, then spiraled lower, then soared again. The market for nonfungible tokens exploded.

Companies made public market debuts with blockbuster valuations. Corporate executives rushed to take advantage of a sky-high stock market, with companies from

Norwegian Cruise Line Holdings Ltd.

to AMC Entertainment Holdings Inc. issuing more shares to raise cash.

Trading burrowed further into pop culture. Rookie investors placed so-called YOLO (“you only live once”) trades, or big risky stock bets, and shared screenshots of their wins and losses on social media.

“When you see your friends making a ton of money in the market, everyone jumps in,” said Zhiwei Ren, a portfolio manager at Penn Mutual Asset Management.

Still, the stock market’s ascent has been anything but calm. GameStop shares went on a tear in January, driven by a social-media frenzy, and single stocks continued to seesaw throughout the year.

Even late in the year, stocks including

Avis Budget Group Inc.

and

Digital World Acquisition Corp.

, a company tied to former President

Donald Trump,

were logging giant one-day swings.

The fireworks weren’t limited to meme stocks. The market values of stocks within the S&P 500 surged or tumbled at a rate approaching the panicked, volatile early days of the Covid-19 pandemic, according to Bank of America Corp. analysts. Even some of the biggest companies in the U.S. recorded mammoth moves, in some cases gaining or losing tens of billions of dollars in market value within days. That includes

Tesla Inc.,

which gained almost $200 billion in market value within four days in late December—more than the equivalent of

Ford Motor Co.

and

General Motors Co.

combined.

“We’ve never seen anything like that in history,” said Dean Curnutt, chief executive of brokerage Macro Risk Advisors, referring to the volatility in some single stocks. “The up crashes have been gigantic.”

Figures from Macro Risk Advisors show that stocks such as GameStop, AMC, Tesla and Nvidia Corp. were more volatile on days the shares were rising than when they were falling, upending the market’s typical dynamics.

“Who said it was escalator up, elevator down for stocks?” wrote Mr. Curnutt in a note to clients.

These moves lured many investors, both institutional and individual, into options, a shift that can make the market vulnerable to bigger swings, some traders have said. Trading activity in options, which give traders the right to buy or sell stocks at a specific price by a stated date, hit the highest level in the industry’s history in data going back to 1973.

By one measure, options trading, which can be riskier than stock trading, is on track to surpass stock activity for the full year for the first time, according to Cboe Global Markets data as of Dec. 28. In 2021, the daily average notional value of traded single-stock options has exceeded $467 billion, compared with around $410 billion of stocks. Notional value measures how much the shares underlying option contracts are worth. The figure fluctuates with daily moves in the shares.

Traders poured gobs of money into options on a handful of highflying tech stocks, with Tesla an overwhelming favorite. Traders spent more than $670 billion on options tied to Tesla, in what is known as premium, according to Cboe data. That is more than they spent on

Amazon.com Inc.,

Apple Inc.,

Nvidia and the

Invesco QQQ Trust

combined.

Initial public offerings and special-purpose acquisition companies, known as SPACs, broke record after record. SPACs as of last week had raised $162 billion in 2021, more than what they raised in the previous decade combined, according to Dealogic. Many of them are unprofitable; around 70% of companies going public through traditional IPOs have been losing money, a greater proportion than even during the tech bubble of the 1990s, according to Bank of America figures as of November.

“This was the year of the risk asset,” said Shanta Puchtler, president of investment company Man Group, which oversees around $140 billion in assets. “Anywhere there was risk and an opportunity for larger returns, we saw that pay off in spades.”

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The heavy speculation left some investors questioning if markets were in a giant bubble, though some of the excitement has started to fizzle. Near-zero interest rates and the central bank’s pandemic interventions have been a key support for stock markets for nearly two years now. The Federal Reserve signaled this month that it is prepared to raise rates next year and pare its bond-buying program at a quicker pace. When rates rise, investors have more options for where to park their money for a gain and can become less willing to take risks.

Investors also had to contend with one big factor that they mostly ignored for the past decade: inflation. U.S. inflation reached nearly a four-decade high last month, raising questions about how many price increases Americans can absorb. The emergence of the Omicron variant has whipsawed U.S. stocks since Thanksgiving.

Shares of the ARK Innovation exchange-traded fund, SPACs and several meme stocks have tumbled from their highs earlier in the year. More than 300 unprofitable companies fell more than 50% from recent peaks and many stocks haven’t participated in the broader market’s ascent in recent months. Many companies that made their public debuts this year are now trading below IPO prices.

“Some of these bubbles have basically bursted,” said

Sébastien Page,

head of global multiasset at

T. Rowe Price,

who oversees around $468 billion in assets. “We have gotten more cautious.”

2021 was a wild year. With Coronavirus still casting much uncertainty over the future of travel, Rivian and Lucid shaking up the auto industry, and Branson, Bezos and Musk all launching their space tourism programs. But what does 2022 have in store? WSJ’s George Downs takes a look at some of the key events that could be making headlines next year.

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com

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